30 March, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Capital Markets

 

WHAT YOU NEED TO KNOW

 

On 13 March 2013, ASX released the final form of its updated ASX Guidance Note 8: Continuous Disclosure. Key points in the final form of Guidance Note 8 include:

 

• clarification on immediacy and the meaning of “promptly and without delay”, that is, acting as quickly as possible in the circumstances to disclose required information and not deferring, postponing or putting it off to a later time;
• whether or not the market is trading when the disclosure obligation is triggered is also a relevant factor for ASX in assessing whether the spirit, intention and purpose of Listing Rule 3.1 has been complied with;
• greater emphasis by ASX on using trading halts (or voluntary suspensions) to manage continuous disclosure obligations. In ASX‘s view, once an entity is aware of market sensitive information (and the carve-out does not apply), the entity should request a trading halt if an announcement cannot be immediately made; 
• greater elaboration on when an entity will be considered to be “aware” and the importance of ensuring an entity has effective processes in place to promptly identify and escalate information within the entity;
• Additional guidance on when a proposal or negotiation is incomplete and ASX‘s expectations around the steps an entity should take to maintain confidentiality if relying on the carve-out in Listing Rule 3.1A;
• new guidance about earnings guidance and earnings surprises (replacing ASX‘s former 10-15% rule of thumb). ASX has clarified when an obligation may arise to correct or update the market’s expectation about earnings. Depending on the circumstances, a departure of 5-10% from previous guidance may be material; and
• confirmation that an entity will not generally be required to disclose a confidential takeover approach and withdrawal of the suggestion in the examples provided by ASX that a potentially competing, confidential, non-binding offer received during a hostile takeover bid process would need to be disclosed.
• ASX anticipates that the revised ASX Guidance Note 8 will be effective on or about 1 May 2013.

 

WHAT YOU NEED TO DO

 

Listed entities should:

 

• revisit their existing policies to consider whether amendments are required for revised GN8 and that they have appropriate procedures for the prompt identification and escalation of potentially market sensitive information;
• ensure that a comprehensive market announcements strategy is in place in relation to all confidential transactions, so that the entity can respond promptly to any leaks in an appropriate manner, and minimise the risk that a trading halt (and any interruption to trading) is required; and
• consider appointing more than one person to be responsible for communications with ASX under Listing Rule 12.6, to cater for one of its contacts being absent or on leave.

 

Overview

 

On 17 October 2012, ASX released a draft revised ASX Guidance Note 8 (draft GN8) as part of a package of material relating to continuous disclosure, including proposed amendments to the Listing Rules, for public consultation.

 

ASX has now completed its consultation process and released the final versions of ASX Guidance Note 8 (revised GN8), the abridged guidance note and its changes to the Listing Rules (these materials are available on the ASX website by clicking here). ASX expects these changes to come into effect on or about 1 May 2013.

 

This update outlines the key features of revised GN8, and discusses the key changes between draft GN8 and revised GN8.

 

Key changes

 

ASX has clarified its approach on a number of key areas and provided more comprehensive explanations as to why particular approaches have been adopted.

 

the whole, the final form of revised GN8 provides listed entities with greater clarity about the standards of disclosure expected of listed entities and endorses the approach that listed entities have taken to a number of disclosure related matters.

 

Listed entities and their officers and advisers – as well as ASX – all recognise that continuous disclosure can be a challenging issue. Officers need to quickly make decisions about the materiality of information and, if required, the manner and timing of any disclosure to the market. Revised GN8 has many helpful practical points and guidance. However, whether and in what form disclosure may be required in any specific circumstance will depend very much on the entity, its situation and the nature of the information concerned.

 

Listing Rule 3.1

 

Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of an entity’s securities, Listing Rule 3.1 requires the entity to immediately tell ASX that information.

 

Information and forward looking statements

 

ASX has confirmed that “information” extends beyond pure matters of fact and includes matters of opinion and intention.

 

ASX, in revised GN8, notes ASIC’s guidance that forward looking statements contained in announcements made under Listing Rule 3.1 should be clearly identified as such and that the material assumptions and qualifications to these statements should be stated in the announcement. ASX endorses this guidance.

 

Immediacy and the meaning of “promptly and without delay”

 

In draft GN8, ASX had indicated that the requirement for “immediate” disclosure was a requirement that information be disclosed “promptly and without delay” rather than a requirement of instantaneous disclosure. In other words, according to ASX, “promptly and without delay” means “doing it as quickly as it can be done in the circumstances (acting promptly) and not deferring, postponing or putting it off to a later time (acting without delay).”

 

ASX has further elaborated upon this by acknowledging that:

 

[a] period of time will necessarily pass between when an entity first becomes obliged to give information to ASX under Listing Rule 3.1 and when it is able to give that information to ASX in the form of a market announcement. This passing of time, of itself, does not mean that there has been a “delay” in the provision of the information to ASX… The question in each case is whether the entity is going about this process as quickly as it can in the circumstances and not deferring, postponing or putting it off to a later time. [Section 4.5]

 

ASX has retained its express recognition of the need to give an entity sufficient time to confirm information. ASX acknowledges the need for an announcement to be carefully drawn so that it is accurate, complete and not misleading. Revised GN8 acknowledges that, in some cases, board or disclosure committee approval may also be necessary. Where this is so, entities should carefully consider requesting a trading halt if they are not able to promptly convene a board meeting to review the draft announcement. (This should be distinguished from the situation where the decision of the board itself gives rise to the disclosure obligation eg declaration of a dividend.)

 

Whether or not the market is trading is also a relevant factor for ASX in assessing whether the entity has complied with the spirit, intention and purpose of Listing Rule 3.1. ASX recognises that the sensitivity of the market to information is at its highest during market trading hours. From ASX‘s perspective, if the disclosure obligation arises outside trading hours, it will generally be sufficient for the entity to give ASX the information before trading next resumes.

 

ASX expects an entity to act particularly quickly if ASX asks it to make an announcement because of a sudden or significant movement in the market price or trading volumes of its securities, or otherwise to prevent a false market.

 

ASX will also expect the entity to act particularly quickly if the information to be announced is especially damaging and likely to cause a significant fall in the market price (such as a lender declaring an event of default and appointing a receiver).

 

If the entity is not in a position to make an announcement straight away in these instances, ASX expects the entity to request a trading halt.

 

Market sensitive information

 

Market sensitive information is information that a reasonable person would expect to have a material effect on the price or value of an entity’s securities if the information “would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose” of those securities (see section 677 of the Corporations Act).

 

Revised GN8 reminds entities that this materiality test is an objective one, with the reference to persons who “commonly invest in” securities being to persons who commonly buy and hold securities for a period of time, based on their view of the inherent value of the security. An honestly held view of an entity’s officers that information is not market sensitive information will not avoid a breach of Listing Rule 3.1, if the officers’ view is ultimately found to be incorrect.

 

As revised GN8 acknowledges, assessing whether information is likely to be market sensitive can be difficult, and officers should bear in mind that their decisions may ultimately be assessed by ASIC or a Court with the benefit of hindsight.

 

As a practical matter, ASX encourages officers to consider two questions when assessing this:

 

• Would this information influence my decision to buy or sell securities in the entity at their current market price?
• Would I feel exposed to an action for insider trading if I were to buy or sell securities in the entity at their current market price, knowing this information had not been disclosed to the market?

 

A yes to these questions should be taken as a “cautionary indication” that the information may well be market sensitive and require immediate disclosure (if the carve-outs do not then apply).

 

ASX also suggests that listed entities may find guidance in the parameters that ASX uses for determining whether or not to refer a possible breach to ASIC. Following the quantitative thresholds in AASB 1031, ASX considers that if the share price changed by 10% or more after the relevant announcement, the information will generally be regarded as material and where the share price changed by less than 5%, the information will generally be regarded as not being material. Where the price movement was between 5% and 10%, the answer will turn on the circumstances of the case but, given the potential consequences which flow from a breach of Listing Rule 3.1, ASX cautions that listed entities would be wise to err on the side of disclosure and disclose if in doubt.

 

Awareness and the importance of effective internal mechanisms

 

Revised GN8 emphasises that market sensitive information that triggers the obligation to make disclosure can be acquired gradually and that the obligation itself is only triggered once an officer of the entity is aware (or ought to be) that the information is market sensitive.

 

In ASX‘s view, “ought reasonably be aware” in the definition of “aware” means that an officer will be deemed to be aware of information that:

 

is of such significance that it ought reasonably to have been brought to the attention of an officer of the entity in the normal course of performing their duties.

 

Given this, it is important that entities have in place effective reporting and escalation measures to ensure that potentially market sensitive information is promptly passed to the relevant officers or fully investigated by the officers because a failure to do so will not prevent a breach of the continuous disclosure requirements.

 

Listed entities have generally addressed this risk by adopting continuous disclosure policies, which identify who has the authority to determine whether a market announcement should be and/or whether a trading halt should be requested, and ensuring that employees are familiar with both the meaning of market sensitive information and to whom potentially market sensitive information should be reported.

 

Trading halts and voluntary suspensions

 

Revised GN8 places an even greater emphasis on the effective use of trading halts to manage continuous disclosure, and expands the discussion to cover “voluntary suspensions” in exceptional cases where the maximum permitted trading halt will not give an entity sufficient time to make the required disclosure.

 

While as a technical matter, a trading halt or suspension does not suspend an entity’s obligation to comply with Listing Rule 3.1, ASX has retained its guidance that:

 

Whether and how promptly an entity has requested a trading halt or voluntary suspension so as to prevent trading in its securities happening on an uninformed basis are significant factors that ASX takes into account in assessing whether the entity has complied with the spirit, intention and purpose of Listing Rule 3.1…

 

Helpfully, revised GN8 confirms that “ASX would not expect an entity to request a trading halt or voluntary suspension before it has assessed whether particular information is in fact market sensitive”.

 

Once an entity is aware of market sensitive information, the entity needs to consider whether it is in a position to disclose the information promptly and without delay. If it can, ASX suggests that, in most cases, a trading halt should not be necessary. However, where:

 

• there are indications that the information is no longer confidential;
• ASX has asked the entity to provide information to correct or prevent a false market; or
• the information is particularly damaging and likely to cause a significant fall in the market price of the entity’s securities,

 

and the entity is not in a position to give an announcement to ASX (either immediately, if the market is trading or before market opens if it is not trading),

 

ASX considers that an entity will need to request a trading halt. ASX emphasises that it expects the person who the entity has nominated to be its authorised contact under Listing Rule 12.6 to be a person with sufficient knowledge to have meaningful discussions with ASX on disclosure matters and to have the authority to request a trading halt if required (or be able to enact appropriate internal processes to obtain internal approvals in a matter of minutes, if ASX contacts the entity). That person must be available by mobile phone at all times between 9am and 5pm on a trading day. An entity can nominate more than one person under Listing Rule 12.6 for this purpose.

 

ASX has clarified that if, for any reason, the entity expects a delay in making an announcement to the market, a trading halt should be requested (eg where the need to make an announcement has arisen, and the entity considers the announcement is so significant that board approval should be sought but a board meeting cannot be held promptly and without delay).

 

Revised GN8 also reaffirms the importance of monitoring the surrounding news and media sources in two scenarios:

 

• when a decision is made not to request a halt while preparing an announcement; and
• when the entity is relying on the carve-out in Listing Rule 3.1A in respect of a material incomplete transaction it is negotiating.

 

In these instances, ASX encourages listed entities to monitor investor blogs and social media sites that the entity is aware regularly post comments about the entity.

 

A comprehensive market announcements strategy may assist an entity, enabling it to respond promptly to any leaks in an appropriate manner, and minimise the risk that a trading halt (and any interruption to trading) is required.

 

Listing Rule 3.1A

 

Listing Rule 3.1A sets out the exception to the requirement for immediate disclosure under Listing Rule 3.1. In order for this exception to be available, the information must:

 

• fall within one of the categories defined at 3.1A.1 (for example, the information concerns an incomplete proposal or negotiation);
• be confidential and ASX must not have formed the view that it has ceased to be confidential; and
• not be information that a reasonable person would expect to be disclosed.

 

Revised GN8 clarifies why ASX believes each of the defined categories do not require disclosure and has also provided greater detail on the confidentiality requirement and the reasonable person test (discussed below).

 

Listing Rule 3.1A.1 – incomplete proposal or negotiations

 

Information concerning an incomplete proposal or negotiation comes within Listing Rule 3.1A.1. Revised GN8 provides that a proposal involving an entity is incomplete unless and until the entity has adopted it and is committed to proceeding with it. Negotiations are incomplete unless and until they result in a legally binding agreement or the entity is otherwise committed to proceeding with the transaction being negotiated. An agreement to facilitate a transaction or negotiation (eg a confidentiality agreement or exclusivity agreement) would not be expected to be disclosed (assuming they remained confidential).

 

Listing Rule 3.1A.2 – loss of confidentiality[make em-dash]

 

The word confidential in Listing Rule 3.1A.2 means “secret”. ASX views information to be confidential if: 

 

• it is known to only a limited number of people;
• the people who know the information understand that it is to be treated in confidence and only to be used for permitted purposes; and
• those people abide by that understanding.

 

Whether information is confidential is a question of fact and entities need to ensure they have suitable and effective arrangements in place to preserve confidentiality, if they wish to rely on the carve-out.

 

Revised GN8 continues to note that ASX may form the view that information has ceased to be confidential where there are reports and rumours in the market that are reasonably specific and reasonably accurate, or a sudden and significant movement in the market price or traded volumes of the entity’s securities that cannot be explained by other events or circumstances.

 

ASX has further clarified that the disclosure required will depend upon the context. Where a rumour/report describes specific and accurate details, ASX expects that confirmation would be required. However, where the rumour is about a proposed transaction with a party but does not contain specific details, ASX will generally only require the entity to disclose the fact that it is in negotiations with the party concerning the transaction, without disclosing further details. If the rumour includes some inaccurate details, the response required will depend on the circumstances, and may require the entity to correct those details or indicate that those details are incorrect (although some care needs to be taken to avoid creating a false market).

 

Clarification of Listing Rule 3.1A.3 – “the reasonable person test”

 

The reasonable person test seeks to balance the needs of the market (access to information) and the interests of the entity (protection and control of information).

 

It is an objective standard, to be judged from the perspective of an independent and judicious bystander and not from the perspective of someone whose interests are aligned with the listed entity or with the investment community.

 

ASX states that, as a general rule, the reasonable person limb will usually be satisfied where the preceding two limbs of 3.1A are satisfied and, as such, the reasonable person test is narrow in operation. To indicate the test’s scope of operation, ASX gives the example of disclosing information where a failure to disclose confidential information would render an announcement incomplete and/or misleading. In such a case, a reasonable person would expect the information to be disclosed to prevent the market being misled.

 

Assuming that the preceding two limbs of 3.1A are satisfied, examples of information that ASX considers a reasonable person would not expect to be disclosed under Listing Rule 3.1A.3 (unchanged from draft GN8) are:

 

• confidential information that the entity is planning a unilateral takeover bid for another entity;
• confidential information that an entity has received an offer from another entity to enter into a control transaction; and
• confidential legal advice concerning litigation.

 

ASX has deleted what was example H6 in draft GN8 following consultation. Example H6 suggested that a reasonable person would expect disclosure of a competing non-binding confidential offer during a hostile takeover process. While on the topic of takeovers, ASX has also confirmed that a confidential rejection of a takeover approach would not normally need to be disclosed (assuming it remained confidential).

 

Other key changes to note

 

False markets: rumours & speculation

 

In response to various submissions, ASX has expressly acknowledged in revised GN8 that the approach of not responding to rumours and speculation adopted by many listed companies is acceptable provided that a false market does not or is not likely to exist. Where a false market arises, or is likely to, ASX will require the entity to respond under Listing Rule 3.1B.

 

Earnings surprises

 

In revised GN8, ASX states that a material difference to the market’s expectations as to earnings for a period will only trigger an obligation to notify under Listing Rule 3.1 if a reasonable person would expect the variation to have a material effect on the price or value of the entity’s securities. Helpfully, ASX lists a number of considerations that will be relevant to assessing when disclosure may be required, including

 

• whether near term earnings is a material driver of the value of the entity’s securities;
• whether the difference is attributable to a non-cash item (such as a depreciation, amortisation or impairment charge) that may not impact on underlying cash earnings;
• whether the difference is a permanent one or simply due to a timing issue.

 

This position is a departure from the view held in the previous Guidance Note 8 that disclosure was required under Listing Rule 3.1 of an expected 10%-15% difference from previous earnings guidance (or, where no guidance was given, prior corresponding period results or consensus forecasts). The change reflects that such a difference will not necessarily have a material effect on price.

 

ASX suggests that the market’s expectation as to earnings for a period can be determined from:

 

• where the entity publishes guidance, that guidance;
• if the entity does not publish guidance but is covered by sell-side analysts, the forecasts of those analysts; and
• if the entity has not published guidance and is not covered by sell-side analysts, its earnings for the prior corresponding period.

 

Revised GN8 stresses that there are a number of approaches which an entity can adopt when using analysts’ forecasts to determine the market’s expectations as to earnings. For instance, entities could choose to base assessments on a “consensus estimate”, which may exclude obvious outliers. Alternatively, entities could refer to the range of analyst forecasts (where they are clustered within a reasonable range). Further, ASX also confirms that a listed entity is not required to correct individual analyst’s earnings forecasts.

 

Another important issue dealt with in the revised GN8 is when the expected variation should be announced. Helpfully, ASX states that, in assessing whether an entity has acted promptly and without delay to announce the expected variation in earnings, ASX will make due allowance for the fact that the preparation of earnings guidance, and the assumptions underpinning it, will need to be properly vetted and signed off by the board before it is released. However, deferring consideration of the matter until the next scheduled board meeting may not be consistent with acting “promptly and without delay”, and it may be necessary for a special board meeting to be convened.

 

Disclosure issues around earnings surprises are more likely to arise towards the end of a reporting period than at the beginning. The more progressed the period, the greater the comparative certainty as to whether the entity’s earnings for the period will differ materially from market expectations.

 

ASX makes a distinction between an entity becoming aware that its earning guidance may require updating and the occurrence of a particular event (for example, a natural disaster affecting a particular project or the cancellation or loss of a material contract or licence). If that event can reasonably be expected to have a material effect on the price or value of the entity’s securities, Listing Rule 3.1 requires immediate disclosure of the underlying facts, even though the listed entity is not, at that time, able to provide updated earnings guidance in light of that event (for example, because it needs to conduct a review of its other projects).

 

Earnings surprises: misleading and deceptive conduct

 

failure to update the market where an entity becomes aware that its earnings for a financial period are materially different from the market’s expectation could constitute misleading and deceptive conduct (apart from any question of compliance with Listing Rule 3.1).

 

In determining what is material for section 1041H purposes, ASX recommends that a variation from published guidance of greater than 10% should be treated as material and that a variation from published guidance of between 5%-10% may be material. This is clearly a smaller variation than the 10%-15% guidance given in the previous Guidance Note 8.

 

ASX notes that whether the materiality threshold is closer to 5% or to 10% will depend on the context and the entity. For instance, a materiality threshold of 10% (or close to it) may be appropriate for smaller listed entities or those with relatively variable earnings. However, a materiality threshold of 5% (or close to it) may be suitable for very large listed entities or those with generally stable or predictable earnings.

 

Exploration and production targets

 

Similar considerations in relation to earnings guidance also apply to exploration and production targets issued by mining or oil and gas entities. Interaction with periodic disclosure obligations Continuous disclosure obligations operate in tandem with periodic disclosure obligations.

 

Revised GN8 provides that “[a]ll other things being equal, a listed entity is not expected to release the information in a periodic disclosure document ahead of the scheduled release date for that document.” ASX confirms (in a footnote) that it has no issue with the practice of boards of entities approving financial results or a declaration of a dividend “in-principle” in the lead up to the scheduled due date for release of that information. (This practice is often undertaken to ensure that any material post-balance date events are accurately reflected in the financial statement or factored into the dividend decision).

 

Nevertheless, if an entity, in the course of preparing periodic disclosure, becomes aware of market sensitive information (eg earnings surprises or material post-balance date events), the entity must disclose that information to ASX immediately under Listing Rule 3.1.

 

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